After the post-pandemic turmoil that ransacked China’s economy, the uneasy turbulence has investors on the edge. At 15% of global exports, China towers as the second-largest economy. Given the skepticism and the marked-down valuations currently plaguing the Chinese market, now might just be the moment to cast a discerning eye over those undervalued Chinese stocks that whisper of opportunity.
Investors, clouded by concerns about China’s real estate turbulence, sluggish growth, and geopolitical jousts, are finding it hard to see the forest for the trees. Yet, in these signs of fear, a shrewd trader might spot the bullish signal. As Warren Buffet’s sage advice goes, “be fearful when others are greedy, and greedy when others are fearful.”
When we look at the figures, the MSCI China index is perched at 9.4 times forward earnings, notably lower than its historical average of 11.6. Meantime, glancing across the ocean, the S&P 500 is sitting pretty at a forward P/E of 21. Such stark discrepancies underscore the undeniable undervaluation of Chinese stocks. Here lie the hidden gems, the pearls waiting to be discovered by the discerning investor.
The E-Commerce Heavyweight: Alibaba (BABA)
Market share ebbs and flows, but Alibaba (NYSE:BABA) remains the titan of e-commerce in China, even as competitors nip at its heels. In the colossal labyrinth of China’s e-commerce market, Alibaba reigns supreme.
Despite the challenges, Alibaba’s e-commerce arm continues to burgeon. In the first quarter ending March 31, Taobao and Tmall racked up $12.9 billion in revenue, marking a respectable 4% year-over-year growth. Furthermore, Alibaba International Digital Commerce Group segment witnessed a 45% YOY spike, propelled by AliExpress and Trendyol’s expansion into the Gulf Region.
Even its cloud intelligence segment, plating database, elastic compute, and AI goods, registered a 3% growth. Not a jaw-dropping number, but AI revenues painted a pretty picture, firing off into the triple digits in the same quarter.
Peering into the horizon, Alibaba stands at the cusp of a gargantuan AI windfall. Its claim to the AI throne, epitomized by the accolades heaped on its large language model, Qwen, is unmistakable. With over 90,000 enterprise deployments secured, the footprints of Alibaba’s AI dominance deepen.
Alibaba, a blend of strong e-commerce cash flows and a promenade with AI’s opportunities, emerges as a star among Chinese stocks to buy. Trading at 10 times forward earnings, this stock is also amplifying its shareholder value with a sizeable $25 billion buyback.
The Restaurant Behemoth: Yum China (YUMC)
Crowned as the titan of China’s restaurant landscape, Yum China (NYSE:YUMC) reigns supreme based on its 2023 system sales. With a vast empire spanning 15,022 restaurants across 2,000 Chinese cities as of March 31, Yum China boasts a constellation of flagship brands such as Pizza Hut and KFC, alongside newcomers like Taco Bell, Huang Ji Huang, Lavazza, and Little Sheep.
Why is Yum China on the radar as one of the prime Chinese stocks to snag? First and foremost, let’s talk valuations. At the time of penning this piece, it trades at 15 times forward non-GAAP earnings, a stark contrast to its 5-year average of 34.
Expand the panorama, and Yum China’s growth runway stretches out ominously. Bolstered by China’s swelling disposable incomes and its iconic brand portfolio, Yum Brands can sow its presence deeper into China’s fabric. Take KFC, boasting the leading market share in China, yet absent in 1,200 Chinese cities. The path lays open for colossal expansion.
As the counters keep mushrooming – 378 new bistros in Q1 of 2024 alone – and with projections of 1,500 to 1,700 fresh joints in 2024 lining up, Yum China’s outline is spangled with opportunities. Top it off with top-line drivers like menu innovations and a whopping 300 million strong loyalty program, and YUMC stock brims with promise.
The Technological Maven: Baidu (BIDU)
Hailed as China’s answer to Google, Baidu (NASDAQ:BIDU) eclipses the Chinese search domain with a commanding 53.3% market share. Though ad revenues fuel its engine, Baidu’s growth lies in diversifying its business horizons. A glance under its hood reveals a host of emerging businesses fueling its future.
Baidu’s cloud services wing, sprouting 6% year-over-year, boasts revenues of $2.6 billion. Another enchanting leap comes from its artificial intelligence arm (AI), especially its ERNIE family of models.
Scaling new AI summits, Baidu blazes as a pacesetter in generative AI with ERNIE and shooting forth a volley of lightweight large language models in Q1 of 2024. Leaning on these pillars, Baidu extends its AI tools arm to foster custom models, AI bots, and AI-woven applications.
The oncoming surge for Baidu emanates from its self-driving ride service, Apollo Go. Reporting about 826,000 rides in Q1 of 2024, marking a 25% YOY uptick, the future holds bright horizons. Noteworthy is its pact with Tesla (NASDAQ:TSLA), where Tesla’s full-service wheels are tapping on Baidu’s navigation and mapping services to steer the road ahead.
The Chinese stocks terrain is rich with value, significant breakthroughs snuggled beneath veil-like valuations. Alibaba’s dominance in e-commerce, Yum China’s expansionary strides, and Baidu’s tech symphony all sing an ode to savvy investors seeking pearls in the ocean of stock markets.
Article updated on June 30, 2024.
Disclaimer: The opinions expressed in the article are solely those of the author and do not reflect the views of the publication.